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A Case Study on the Balkans -Introduction
A ll o f the countries o f post-1989 Central and Eastern Europe have announced their intention to set up market economies. There were, however, great differences in the preconditions fo r their starts, in the various policy-packages they adopted, and in the progress they have made in achieving the first economic targets (e.g. macro-economic stabilization, reduction o f budget deficits, slowdown o f inflation, etc.). There were, furthermore, differences in the new legal and institutional structures which the new market economies require.
In 1992 a further widening o f the gap between Central and Eastern Europe and the form er Soviet Union could be observed1 but the differences among the individual smaller Central and Eastern European countries also became greater as far as their economic performance and their (domestic) political environment were concerned. In particular, a clear difference emerged between the Central European countries - Poland, Czechoslovakia (now the Czech and the Slovak Republics) and Hungary - on the one hand, and the South-East European countries - Albania, Bulgaria, Romania, and the successor states o f form er Yugoslavia - on the other. This suggests, in effect, that as the transition proceeds, these differences w ill become more and more pro- nounced and decisive.
When serious reform debates began in Central and Eastern Europe in the second h a lf o f the 1980s, the various countries o f the region were at very different stages o f preparation and development. First o f all, the theoretical foundations fo r reform discussions had developed quite differently. Hungary and Poland had a long lasting tradition o f studying Western economic theory and o f discussing alternative concepts fo r (and w ithin) the existing state socialist model. For example the ideas o f com- petitive market socialism o f Oscar Lange, and the contributions o f Michael Kalecki and Janos Komai were discussed. U nlike in isolated South-Eastern Europe, there have been extensive exchanges o f scholars w ith the West, and access to Western eco- nomie literature was not restricted in these two reform-oriented Central European countries.
As a consequence, today the number o f possible candidates fo r fillin g important positions in the economy or in politics is by far smaller in Albania, Bulgaria or Romania - and, o f course, also in the successor states o f the form er Soviet Union - than it is in Hungary or Poland. The fundamental principle o f state socialism, (i.e. the superiority o f “ socialist” - state and cooperative - over private ownership o f the means o f production) could more easily be questioned in Hungary and Poland (in Poland the greater part o f agriculture had remained in private hands, even under
com-1 Econom ic Bulletin for Europe, Vol. XLIV, com-1992, ECE, p. 26.
munist rule), and the effectiveness o f market mechanism could im plicitly be acknow- ledged. Demands for decentralization and for liberalization o f prices were not such absolute novelties there as they were in Albania or Romania.
The situation in the former GDR and also in Czechoslovakia was somewhat more complicated. Ideological positions impeded unorthodox economic thinking, although, in particular in these two most developed countries o f the former Soviet Bloc, a revi- talization o f old market traditions should have been easier. Despite strong ideological barriers and isolation from the West in Czechoslovakia during the years o f state socialism, many economists could acquire a high level o f education and knowledge which they were unable to apply in practice because the restrictive political conditions would not allow it.
This lack o f earlier theoretical debates and preparedness as well as the relatively small number o f experts capable o f taking charge o f the political and economic res- ponsibilities placed the countries o f South-Eastern Europe at a disadvantage once the moment o f dramatic change arrived. It turned out to be extremely d ifficu lt to develop schemes o f systemic transformation appropriate fo r the specific conditions in the res- pective countries. This then led to what in effect was the copying o f the general trans- formation programs that either have been outlined by economists in the Central Euro- pean countries (e.g. the Czech voucher privatization plan) or which have been proposed or, even dictated by Western advisers and institutions (stabilization policies) as preconditions for receiving further financial assistance. We can speak o f a Polish, Hungarian or Czech path toward transition, but there is no such “ tailored program” for the Balkans.
Another disadvantage o f South-Eastern Europe should be mentioned in this context, although this is even more d ifficu lt to quantify and verify. That is the lack o f constant ties between the homeland and the diaspora which, in the case o f Poland and Hungary and to a certain extent also fo r Czechoslovakia, nowadays plays an impor- tant role. In particular, state socialist Poland and Hungary had cultivated rather close relations with their emigrants throughout the socialist years. These emigrants pro- duced strong lobbies that exerted considerable influence on the attitude o f the West towards these two countries. Such assistance is not at all apparent in the case o f Albania, Bulgaria or Romania.
1. In the Footsteps o f the Pioneering Countries
The policy-packages adopted by the countries in economic transformation consist mainly o f two groups o f policy measures: macro-economic stabilization policies and transformation policies proper. Stabilization policies were directed towards con- trolling inflation, which would inevitably result from the liberalization o f prices and towards reducing state budget deficits. Both measures were combined with general attempts to establish order in the new monetary system. The results so far have been mixed and d iffe r widely in the region, reflecting to the depth o f the initial macro-eco- nomic imbalances as well as the effectiveness o f individual stabilization programs.2 : Ibid.p. 32.
Economic Transformation: A Case Study on the Balkans 147
In 1991 all countries in South-East Europe, except Romania, registered budget deficits exceeding the targeted levels which had been set by the International Monetary Fund (IM F) and whose attainment was linked to the disbursal o f IM F loans. In Alba- nia, the fiscal situation had deteriorated markedly as early as 1990 when the deficit exceeded 16% o f GDP. In 1991, however, it already reached a record high o f 44%. For
1992, the figures range from a 0.3% surplus in Slovenia (which managed to overcome the relatively small deficit o f 2.6% in 1991) to a deficit o f more than 10% in Bulgaria, and 22% in Albania. In 1993, the best performance, again, was achieved by Slovenia with an estimated deficit o f 1.7%, whereas Bulgaria improved to 8.5%. A clear im- provement, moreover, a real success compared to 1991, is expected for Albania with a budget deficit that should not have exceeded 16% o f the GDP in 1993.3
In all o f these countries budget revenues have been consistently overestimated, because fiscal reforms need much more time than anticipated and because the reces- sion has turned out to be much more severe than expected. Not only did enterprise profits fall substantially, but tax evasion also became widespread in the new private sector, which in Hungary, and even more in Poland, is rapidly gaining importance.
Budget deficits in the successor states o f former Yugoslavia (other than Slovenia) are large and growing, mainly due to the impacts o f the ongoing war and, in the case o f Macedonia, Serbia and Montenegro, the United Nations sanctions on rump Yugo- slavia.
As a more or less expected outcome o f price liberalization inflation was high throughout Central and Eastern Europe, although again with considerable differences between countries. Whereas in Czechoslovakia and Hungary a slowdown in the rate o f inflation can already be observed, developments in South-Eastern Europe are not uniform: Bulgaria’s rate o f inflation in 1992 was 80% which reflected an improve- ment compared to the preceding year (338%). Estimates for 1993 put the rate o f inflation again at approximately 80%,4 although in the second half o f the year an improvement seemed to develop. Rumanian consumer prices may well increase by 210% in 1993 as was the case in 1992, compared to 165% in 1991.5 High rates o f inflation had to be expected also for Croatia and the Federal Republic o f (“ small” ) Yugoslavia where annual rates o f inflation rose from 123% in 1991 to 664% in 1992, and from 121 % to 9,237% respectively. For 1993, estimates o f the rate o f inflation for Croatia are close to 1,200%, whereas in rump Yugoslavia the monthly rate o f inflation surmounted the 200,000 mark in December 1993.6 In Albania, where some prices were liberalized in November 1991 (those for basic consumer goods have remained under state control), consumer prices had risen by more than 70% until June 1992.7 The peak was reached in end 1992 with a rate o f inflation o f 237% against end 1991.
However, until December 1993, this annual rate was reduced to 31%.8
3 IMF Survey, May 16, 1994, p. 157.
4 PlanEcon Report, Nos. 34-35-36, October 12, 1993.
5 H. Gabrisch, “Im Zeichen westlicher Rezession. Die Wirtschaftslage der post-sozialistischen Länder im ersten Quartal 1993 und Ausblick 1993-94.” WHW-Forschungsberichte, N0. 197a, June 1993.
6 Frankfurter Allgemeine Zeitung, December 27, 1993. p. 3.
7 ECE: O p .c it.// p. 33.
8 IMF S u n ׳ey, May 16. 1994, p. 157.
Fiscal and monetary policies were relatively restrictive in all the countries con- cemed in the early nineties, but fiscal policy, in particular, very soon came up against the problems inherited from the old regime: fo r instance, cuts in subsidies for non- competitive industries. Most o f Central and Eastern Europe’s industries are not com- petitive on the world market. Furthermore, tight monetary policies cause large-scale closures o f state enterprises, where the majority o f workers are still employed.
Consequently, high rates o f unemployment emerged: 9,3% in Romania, 14.4% in Slovenia and 17% in Bulgaria (all by m id-1993). The situation was worse still in Albania, where only very vague estimates oscillate between some 30% and 50%, and war-affected countries such as Croatia (17.2%) and rump Yugoslavia (between some 20%, as o fficia lly stated, and probably 40% in fact). The new governing parties in these countries are very cautious to make measures which may further increase un- employment. Thus one cannot expect further substantial cuts in state expenditures.
Monetary policy was rather tight in all countries, at least in the beginning o f the transformation period, but market rates o f credits became too high for enterprises seeking finance. Banks are very reluctant to lend money when profit prospects are dim, and securities very often cannot be provided because ownership conditions are still uncertain. In the meantime, inter-enterprise crediting has undermined the role o f the “ normal” financial system which is controlled by the state. As soon as bankruptcy laws are adopted, the number o f enterprises being forced to close w ill increase rapidly, as the Hungarian example has shown. Some softening o f monetary policy has been observed in Bulgaria and Albania.
Liberalization policy was also applied in foreign trade in these countries. In gene- ral, governments resort less and less frequently to formal control o f trade flows. This phenomenon is partly explained by the rapid increase in the number o f firms engaged in foreign transactions. Quotas or licensing in exports exist only fo r fuels and raw materials in Albania and Bulgaria, and for some foodstuffs in Romania. For imports, some global quotas still are applied for consumer goods in Albania, whereas only Romania still makes general use o f quotas or licensing for its imports.9
Some sort o f control o f the access to foreign exchange still exists in South-Eastern Europe. Slovenia at present seems to be the most liberal country in this respect, not only offering internal convertibility but being fa irly close to fu ll convertibility.
Bulgaria uses a system o f limited internal convertibility. Romania declared internal convertibility in November 1991, but de facto suspended it in May 1992, a result o f the great imbalance between supply and demand fo r foreign exchange. The Albanian experience also demonstrates that limited internal convertibility o f currency works. In spite o f the small hard currency reserves, the Lek (Albanian currency) did well in 1993 - the exchange rate could be revalued by 15 % compared w ith December 1992.
2. Privatization as the Essence o f Institutional Transformation
The liberalization o f prices and foreign trade, and the introduction o f new taxation belong to institutional changes as well as deregulation o f private sector activities,
9 Economic Bulletin fo r Europe. Vol. XLIV, 1992, ECE, pp. 55, 57.
Economic Transformation: A Case Study on the Balkans 149
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anti-monopoly legislation and various other changes in the legal field. Most attention, however, seems to be devoted to the privatization o f state-owned enterprises.
Compared to the countries o f Central Europe the process o f privatization started later and is proceeding rather slowly in South-Eastern Europe. This holds true mainly for the transformation o f the former state- or cooperative-owned enterprises. The pos- sibility o f setting-up new private firms (“ grassroots privatization” ) was allowed also in these countries very soon after 1989.
Bulgaria, which at the beginning was rather successful with its monetary stabiliza- tion program and therefore also received rather good evaluations from the internatio- nal organizations, was for some time hampered by the strong position o f the former Communist (now Socialist) Party. Only in spring o f 1992 did restitution laws come into force. They regulated the return o f enterprises and real estate that had been expropriated by the Communists. According to the Deputy Prime M inister o f the D im itrov Government (which resigned in November 1992), almost 80% o f the municipal properties (houses, shops, storehouses) in the Sofia region, earmarked for restitution, should have been returned by the end o f September 1992.
Reprivatization o f agricultural land had already been initiated w ith a new law in spring 1991, but gained momentum only after an amendment o f the respective law one year later, when restrictions concerning the number o f hectares to be available for restitution had been lifte d .10 By the end o f 1992, some 27% o f agricultural land had been returned to private owners.
More important, however, was the passing o f the law on Transformation and Priva- tization o f State-Owned and Municipal-Owned Enterprises in A p ril 1992. However, not very much has happened so far. As late as in November 1992, the first two enter- prises were in fact privatized. In m id-1992, the share o f private firm s in manufac- turing was only 1.3%, whereas the share o f private entrepreneurs in retail trade turn- over (mainly new small businesses) had already reached 41.7%.
In August 1993, the Berov Government finally decided to introduce the principle o f mass privatization. According to the decision, the state w ill issue vouchers in a total value o f 200 b illio n Lewa (about $6.5 billion). Each Bulgarian citizen above the age o f 20 w ill receive vouchers worth 30,000 Lewa, offering two possibilities: participa- tion in the privatization o f a group o f enterprises and/or a bank, or participation in the direct privatization o f one enterprise. Parallel to this mass privatization, the privatiza- tion agency w ill also try to sell state enterprises through auctions.11 As o f the end o f 1993, however, not much had happened: in 17 auctions conducted by the M inistry o f
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Agriculture only 4 state properties could be sold. Vice Premier Karabashev reported that out o f a total o f 32 privatization cases, 20 were accomplished by the M inistry o f Trade, 8 by other ministries and only 4 by the privatization agency.
Romania also has lost much time which it could have spent on transforming the economy because o f its intricate political structure. In contrast to the other former state socialist countries Romania started privatization with the return o f agricultural
10 Neue Zürcher Zeitung, November 26, 1992; and Nachrichten fü r Außenhandel, June 6, 1992.
11 Radio Sofìa IS, August 4, 1993.
12 Bulgarisches Wirtschaftsblatt, December 1993, p. 4.
13 Ibid. November 1993, p. 4.
land on the basis o f a law which was adopted by the parliament in February 1991. It declared that by the end o f 1992, 82% o f agricultural land had already been trans- ferred into private ownership. This figure, however, must be taken very cautiously. An increase o f agricultural production by approximately 11% in 1993 seems to indicate that some relief in this sector has been achieved as a result o f land-privatization.14
The law on privatization o f enterprises was enacted by the parliament at the end o f July 1991. This law established five Funds fo r Private Property which would admini- ster 30% o f the capital stock o f some 6,200 enterprises, representing approximately 55% o f the stock value o f state-owned enterprises. The remaining 45% (some 330 large firm s) belong to the so-called strategic sector and w ill be kept in state owners- hip as self-administrated state enterprises (régies autonomes). So far only some 1,650 smaller industrial units have been privatized. A new start for the larger enterprises was planned with a voucher system which was supposed to come into operation in late 1993. However, another delay is to be expected. According to official Romanian estimates, about 400,000 registered private firm s already cover approximately 40%
o f retail trade turnover and some 20% o f industrial output. They also employ half a m illion persons. The Statistical Office claims a share o f 25% o f private activities in Romanian GDP.15
Slovenia needed two years o f political debates before the privatization law was enacted by the parliament, just one day before the elections in December 1992. A first revision o f the new law occurred in June 1993. It is a complicated compromise o f sale and cost-free distribution o f state-owned property. The basic scheme provides that 10% o f the shares o f each enterprise w ill first be given to the state pension fund.
Another 10% w ill go to the restitution fund, 20% w ill be distributed among the employees, and 20% w ill be spread through investment funds (which have to be established) over the population. The remaining 40% o f the shares w ill be sold through standard methods.
The former Yugoslav self-managerial system, i.e. the quasi ownership o f the firm s’
employees (instead o f state ownership) caused special problems for Slovenia. By mid- 1993 the evaluation and formulation o f privatization programs o f some 2,700 enter- prises should have been elaborated. Privatization models include internal distribution o f shares as well as international tenders. Former owners might also bring in their claims, but only within a two-months period. At last, a version o f voucher privatization became the predominant method o f privatizing public properties in Slovenia.
By November 1993, only 59 privatization proposals had been presented to the privatization agency and 23 o f them have been approved, which means that the pro- cedure o f realization could start. Yet, not all necessary enforcement decrees accom- panying the privatization law have been issued. For example, the law on investment funds did not pass parliament until the end o f 1993. Therefore, the privatization time lim it for enterprises has been prolonged. The enterprises had been requested to compile opening balances by the end o f December 1993 in order to speed up the ownership reform. It is obvious that many managers as well as workers councils, who are supposed to work out the opening balances, are not very interested in a rapid
14 Frankfurter Allgemeine Zeitung, December 14, 1993.
15 Ibid. February 15, 1993.
change o f ownership rights, because they are afraid o f loosing their former privileges.
It pays to note that among the 59 privatization proposals presented so far, manage- ment and employee buy-out solutions prevail.
Privatization o f some 100 large enterprises which, since October 1992, are directly subordinated to the State Development Fund Sklad, (the Slovenian equivalent o f the German Treuhand) became somewhat easier. Some o f these enterprises were facing enormous financial problems and had therefore been assigned to the Fund in order to be restructured. Others joined it voluntarily. The Fund tried to stabilize these enter- prises by short-term financial support, but also by slimming down. I f this turns out to be impossible, the liquidation o f the firm s w ill be the final solution. So far the losses o f these enterprises have been cut by 50%, and employment was reduced from a former total o f 52,000 persons down to 35,000 by the end o f 1993. When the firms become more attractive, they w ill be offered fo r acquisition. By the end o f 1993, 15 enterprises and 5 subsidiaries had been sold to their managers and to domestic and foreign investors.16
As in Slovenia most o f the enterprises in Croatia were self-managed which meant that management was not responsible to the respective ministries but to the em- ployees, and they were also subject to the control o f the Communist Party. Croatia, too, had adopted a privatization law in m id -1992, establishing a Privatization Agency and a State Development Fund. U ntil the end o f 1992, applications for autonomous privatization could be submitted by the enterprises themselves, but the war in the second half o f 1991, which extended into 1992, hampered privatization attempts sub- stantially.
Divided into two phases, 3,900 enterprises were foreseen for privatization: First,
Divided into two phases, 3,900 enterprises were foreseen for privatization: First,